Edgar Filing: ARBOR REALTY TRUST INC

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-32136

Arbor Realty Trust, Inc.

(Exact name of registrant as specified in its charter)

Maryland		20-0057959
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)

333 Earle Ovington Boulevard, Suite 900 Uniondale, NY		11553
(Address of principal executive offices)		(Zip Code)

(Registrant’s telephone number, including area code): (516) 506-4200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer x	Smaller reporting company	o
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common stock, $0.01 par value per share: 61,702,628 outstanding as of October 27, 2017.

Table of Contents

INDEX

PART I. FINANCIAL INFORMATION			2
	Item 1. Financial Statements (Unaudited)		2
		Consolidated Balance Sheets	2
		Consolidated Statements of Income	3
		Consolidated Statements of Comprehensive Income	4
		Consolidated Statement of Changes in Equity	5
		Consolidated Statements of Cash Flows	6
		Notes to Consolidated Financial Statements	8
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		50
	Item 3. Quantitative and Qualitative Disclosures about Market Risk		64
	Item 4. Controls and Procedures		65
PART II. OTHER INFORMATION			65
	Item 1. Legal Proceedings		65
	Item 1A. Risk Factors		65
	Item 6. Exhibits		66
Signatures			67

Table of Contents

Forward-Looking Statements

The information contained in this quarterly report on Form 10-Q is not a complete description of our business or the risks associated with an investment in Arbor Realty Trust, Inc. We urge you to carefully review and consider the various disclosures made by us in this report.

This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments and financing needs. We use words such as “anticipate,” “expect,” “believe,” “intend,” “should,” “will,” “may” and similar expressions to identify forward-looking statements, although not all forward-looking statements include these words. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in economic conditions generally and the real estate market specifically; adverse changes in our status with government-sponsored enterprises affecting our ability to originate loans through such programs; changes in interest rates; the quality and size of the investment pipeline and the rate at which we can invest our cash; impairments in the value of the collateral underlying our loans and investments; changes in federal and state laws and regulations, including changes in tax laws; the availability and cost of capital for future investments; and competition. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect management’s views as of the date of this report. The factors noted above could cause our actual results to differ significantly from those contained in any forward-looking statement.

Additional information regarding these and other risks and uncertainties we face is contained in our annual report on Form 10-K for the year ended December 31, 2016 (the “2016 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 3, 2017 and in our other reports and filings with the SEC.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2017			2016
	(Unaudited)
Assets:
Cash and cash equivalents	$	84,751,397		$	138,645,430
Restricted cash	137,138,389			29,314,929
Loans and investments, net	1,997,555,985			1,695,732,351
Loans held-for-sale, net	333,267,976			673,367,304
Capitalized mortgage servicing rights, net	247,875,659			227,742,986
Available-for-sale securities, at fair value	4,707,085			5,403,463
Securities held-to-maturity, net	18,851,089			—
Investments in equity affiliates	31,330,740			33,948,853
Real estate owned, net	17,354,720			19,491,805
Due from related party	12,613,313			1,464,732
Goodwill and other intangible assets	123,166,816			97,489,884
Other assets	49,564,693			48,184,509
Total assets	$	3,058,177,862		$	2,970,786,246

Liabilities and Equity:
Credit facilities and repurchase agreements	$	562,326,537		$	906,636,790
Collateralized loan obligations	1,066,230,488			728,441,109
Senior unsecured notes	95,088,379			94,521,566
Convertible senior unsecured notes, net	95,381,121			80,660,038
Junior subordinated notes to subsidiary trust issuing preferred securities	139,418,416			157,858,555
Related party financing	50,000,000			50,000,000
Due to related party	—			6,038,707
Due to borrowers	69,357,152			81,019,386
Allowance for loss-sharing obligations	30,158,464			32,407,554
Other liabilities	104,474,096			86,164,613
Total liabilities	2,212,434,653			2,223,748,318

Commitments and contingencies (Note 15)

Equity:
Arbor Realty Trust, Inc. stockholders’ equity:
Preferred stock, cumulative, redeemable, $0.01 par value: 100,000,000 shares authorized; special voting preferred shares; 21,230,769 shares issued and outstanding; 8.25% Series A, $38,787,500 aggregate liquidation preference; 1,551,500 shares issued and outstanding; 7.75% Series B, $31,500,000 aggregate liquidation preference; 1,260,000 shares issued and outstanding; 8.50% Series C, $22,500,000 aggregate liquidation preference; 900,000 shares issued and outstanding	89,508,213			89,508,213
Common stock, $0.01 par value: 500,000,000 shares authorized; 61,702,628 and 51,401,295 shares issued and outstanding, respectively	617,026			514,013
Additional paid-in capital	702,240,622			621,931,995
Accumulated deficit	(112,069,714		)	(125,134,403		)
Accumulated other comprehensive income	205,761			320,917
Total Arbor Realty Trust, Inc. stockholders’ equity	680,501,908			587,140,735
Noncontrolling interest	165,241,301			159,897,193
Total equity	845,743,209			747,037,928
Total liabilities and equity	$	3,058,177,862		$	2,970,786,246

See Notes to Consolidated Financial Statements.

Table of Contents

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016

Interest income	$	42,139,576		$	29,636,227		$	110,132,866		$	83,424,190
Other interest income, net	—			—			—			2,539,274
Interest expense	23,849,417			16,966,228			63,697,641			42,958,329
Net interest income	18,290,159			12,669,999			46,435,225			43,005,135
Other revenue:
Gain on sales, including fee-based services, net	17,126,106			9,693,822			55,127,004			9,693,822
Mortgage servicing rights	18,897,239			15,968,067			56,181,638			15,968,067
Servicing revenue, net	8,520,111			5,885,884			19,922,901			5,885,884
Property operating income	2,668,055			2,960,940			8,754,518			12,719,027
Other income, net	777,656			359,546			(929,893		)	663,977
Total other revenue	47,989,167			34,868,259			139,056,168			44,930,777
Other expenses:
Employee compensation and benefits	25,194,433			14,216,679			66,860,581			22,856,433
Selling and administrative	7,606,936			5,903,031			23,135,750			10,277,844
Acquisition costs	—			6,406,258			—			10,261,902
Property operating expenses	2,582,745			2,819,004			7,842,571			10,991,823
Depreciation and amortization	1,829,016			1,808,765			5,541,991			3,129,410
Impairment loss on real estate owned	—			—			2,700,000			11,200,000
Provision for loss sharing (net of recoveries)	(2,617,064		)	1,316,862			(405,494		)	1,316,862
Provision for loan losses (net of recoveries)	2,000,000			(54,000		)	(455,653		)	(24,995		)
Management fee - related party	—			3,325,000			6,673,260			8,875,000
Total other expenses	36,596,066			35,741,599			111,893,006			78,884,279
Income before gain on extinguishment of debt, gain on sale of real estate, income from equity affiliates and provision for income taxes	29,683,260			11,796,659			73,598,387			9,051,633
Gain on extinguishment of debt	—			—			7,116,243			—
Gain on sale of real estate	—			—			—			11,630,687
Income from equity affiliates	995,312			4,929,375			1,755,145			11,193,918
Provision for income taxes	(6,708,000		)	(300,000		)	(16,244,000		)	(300,000		)
Net income	23,970,572			16,426,034			66,225,775			31,576,238
Preferred stock dividends	1,888,430			1,888,430			5,665,290			5,665,290
Net income attributable to noncontrolling interest	5,661,184			3,649,432			16,596,415			3,649,432
Net income attributable to common stockholders	$	16,420,958		$	10,888,172		$	43,964,070		$	22,261,516

Basic earnings per common share	$	0.27		$	0.21		$	0.78		$	0.43
Diluted earnings per common share	$	0.26		$	0.21		$	0.77		$	0.43

Weighted average shares outstanding:
Basic	61,582,796			51,390,467			56,602,504			51,272,795
Diluted	83,918,117			70,271,796			78,942,919			51,627,550

Dividends declared per common share	$	0.18		$	0.16		$	0.53		$	0.46

See Notes to Consolidated Financial Statements.

Table of Contents

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net income	$	23,970,572		$	16,426,034		$	66,225,775		$	31,576,238
Unrealized loss on securities available-for-sale, at fair value	(235,158		)	(88,184		)	(352,735		)	(117,579		)
Unrealized gain (loss) on derivative financial instruments, net	—			66,254			202			(195,981		)
Reclassification of net realized loss on derivatives designated as cash flow hedges into earnings	—			1,316,157			237,377			4,012,457
Comprehensive income	23,735,414			17,720,261			66,110,619			35,275,135
Less:
Comprehensive income attributable to noncontrolling interest	5,601,567			3,974,327			16,574,284			3,974,327
Preferred stock dividends	1,888,430			1,888,430			5,665,290			5,665,290
Comprehensive income attributable to common stockholders	$	16,245,417		$	11,857,504		$	43,871,045		$	25,635,518

See Notes to Consolidated Financial Statements.

Table of Contents

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)

Nine Months Ended September 30, 2017

	Preferred Stock Shares	Preferred Stock Value		Common Stock Shares		Common Stock Par Value			Additional Paid- in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income			Total Arbor Realty Trust, Inc. Stockholders’ Equity			Noncontrolling Interest			Total Equity

Balance — December 31, 2016	24,942,269	$	89,508,213	51,401,295		$	514,013		$	621,931,995	$	(125,134,403	)	$	320,917		$	587,140,735		$	159,897,193		$	747,037,928
Issuance of common stock				9,500,000		95,000			76,130,000								76,225,000						76,225,000
Stock-based compensation				806,524		8,065			3,825,296								3,833,361						3,833,361
Forfeiture of unvested restricted stock				(5,191	)	(52		)	52								—						—
Issuance of convertible senior unsecured notes, net									353,279								353,279						353,279
Distributions - common stock											(30,888,612		)				(30,888,612		)				(30,888,612		)
Distributions - preferred stock											(5,665,290		)				(5,665,290		)				(5,665,290		)
Distributions - preferred stock of private REIT											(10,769		)				(10,769		)				(10,769		)
Distributions - noncontrolling interest																				(11,252,307		)	(11,252,307		)
Net income											49,629,360						49,629,360			16,596,415			66,225,775
Unrealized loss on securities available-for-sale														(352,735		)	(352,735		)				(352,735		)
Unrealized gain on derivative financial instruments, net														202			202						202
Reclassification of net realized loss on derivatives designated as cash flow hedges into earnings														237,377			237,377						237,377
Balance — September 30, 2017	24,942,269	$	89,508,213	61,702,628		$	617,026		$	702,240,622	$	(112,069,714	)	$	205,761		$	680,501,908		$	165,241,301		$	845,743,209

See Notes to Consolidated Financial Statements.

Table of Contents

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended September 30,
	2017			2016
Operating activities:
Net income	$	66,225,775		$	31,576,238
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	5,541,991			3,129,410
Stock-based compensation	3,833,361			2,940,174
Amortization and accretion of interest and fees, net	3,296,464			2,539,980
Amortization of capitalized mortgage servicing rights	35,427,217			7,586,524
Originations of loans held-for-sale	(3,287,578,091		)	(853,935,531		)
Proceeds from sales of loans held-for-sale, net of gain on sale	3,621,276,437			975,969,372
Payoffs and paydowns of loans held-for-sale	116,174			—
Mortgage servicing rights	(56,181,638		)	(15,968,067		)
Write-off of capitalized mortgage servicing rights from payoffs	10,713,274			1,669,081
Impairment loss on real estate owned	2,700,000			11,200,000
Provision for loan losses (net of recoveries)	(455,653		)	(24,995		)
Provision for loss sharing (net of recoveries)	(405,494		)	1,316,862
Net charge-offs for loss sharing obligations	(1,843,596		)	(2,131,178		)
Gain on extinguishment of debt	(7,116,243		)	—
Gain on sale of real estate	—			(11,630,687		)
Gain on sale of securities	—			(15,491		)
Deferred tax provision	15,000			—
Income from equity affiliates	(1,755,145		)	(11,193,918		)
Change in fair value of available-for-sale securities	343,642			46,021
Changes in operating assets and liabilities	(6,252,023		)	5,894,972
Net cash provided by operating activities	387,901,452			148,968,767

Investing Activities:
Loans and investments funded and originated, net	(1,051,445,805		)	(725,025,857		)
Payoffs and paydowns of loans and investments	758,138,665			531,874,076
Internalization of management team	(25,000,000		)	—
Deferred fees	7,213,824			7,412,018
Investments in real estate, net	(562,025		)	(611,497		)
Contributions to equity affiliates	(692,536		)	(4,641,973		)
Distributions from equity affiliates	2,340,710			731,942
Acquisition of the Agency Business, net of cash acquired	—			(68,356,323		)
Proceeds from sale of real estate, net	—			49,029,780
Proceeds from sale of available-for-sale securities	—			1,567,207
Purchase of securities held-to-maturity, net	(18,339,271		)	—
Payoffs and paydowns of securities held-to-maturity	76,300			—
Due to borrowers and reserves	(22,571,250		)	128,492
Net cash used in investing activities	(350,841,388		)	(207,892,135		)

Financing activities:
Proceeds from repurchase agreements, loan participations, credit facilities and notes payable	6,073,385,393			1,681,492,236
Payoffs and paydowns of repurchase agreements, loan participations and credit facilities	(6,417,833,725		)	(1,807,884,108		)
Payoffs of junior subordinated notes to subsidiary trust issuing preferred securities	(12,691,086		)	—
Paydowns and payoffs of mortgage note payable - real estate owned	—			(27,155,000		)
Proceeds from collateralized loan obligations	561,874,000			250,250,000
Payoffs and paydowns of collateralized loan obligations	(219,000,000		)	—
Proceeds from convertible senior unsecured notes	13,750,000			—
Change in restricted cash	(107,793,983		)	(123,982,753		)
Receipts on swaps and returns of margin calls from counterparties	429,539			3,440,049
Distributions paid on common stock	(30,888,612		)	(23,573,786		)
Distributions paid on noncontrolling interest	(11,252,307		)	—
Distributions paid on preferred stock	(5,665,290		)	(5,665,290		)
Distributions paid on preferred stock of private REIT	(10,769		)	(10,849		)
Payment of deferred financing costs	(11,482,257		)	(5,081,844		)
Proceeds from issuance of common stock	76,225,000			—
Net cash used in financing activities	(90,954,097		)	(58,171,345		)

Net decrease in cash and cash equivalents	(53,894,033		)	(117,094,713		)
Cash and cash equivalents at beginning of period	138,645,430			188,708,687
Cash and cash equivalents at end of period	$	84,751,397		$	71,613,974

See Notes to Consolidated Financial Statements.

Table of Contents

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

	Nine Months Ended September 30,
	2017		2016

Supplemental cash flow information:
Cash used to pay interest	$	53,150,362	$	36,287,261
Cash used to pay taxes	$	14,653,499	$	298,654

Supplemental schedule of non-cash investing and financing activities:
Distributions accrued on 8.25% Series A preferred stock	$	266,664	$	266,664
Distributions accrued on 7.75% Series B preferred stock	$	203,438	$	203,438
Distributions accrued on 8.50% Series C preferred stock	$	159,375	$	159,375
Distributions accrued on special voting preferred shares	$	—	$	3,396,923
Related party financing	$	—	$	50,000,000
Payment due on the acquisition of the Agency Business	$	—	$	11,416,610
Working capital adjustment on the acquisition of the Agency Business	$	—	$	7,982,584
Issuance of special voting preferred shares and operating partnership units in connection with the Acquisition	$	—	$	154,772,306

See Notes to Consolidated Financial Statements.

Table of Contents

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

Note 1 — Description of Business

Arbor Realty Trust, Inc. (the “Company,” “we,” “us,” or “our”) is a Maryland corporation formed in 2003. Through our Structured Loan Origination and Investment Business, or “Structured Business,” we invest in a diversified portfolio of structured finance assets in the multifamily and commercial real estate markets, primarily consisting of bridge and mezzanine loans, including junior participating interests in first mortgages, preferred and direct equity. We may also directly acquire real property and invest in real estate-related notes and certain mortgage-related securities. Through our Agency Loan Origination and Servicing Business, or “Agency Business,” which was formed as a result of the acquisition of the agency platform of Arbor Commercial Mortgage, LLC (“ACM” or our “Former Manager”) in the third quarter of 2016 (the “Acquisition”), we originate, sell and service a range of multifamily finance products through the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac,” and together with Fannie Mae, the government-sponsored enterprises, or the “GSEs”), the Government National Mortgage Association (“Ginnie Mae”), Federal Housing Authority (“FHA”) and the U.S. Department of Housing and Urban Development (together with Ginnie Mae and FHA, “HUD”) and the conduit/commercial mortgage-backed securities (“CMBS”) programs. We retain the servicing rights and asset management responsibilities on substantially all loans we originate and sell under the GSE and HUD programs.

Prior to May 31, 2017, we were externally managed and advised by ACM. Effective May 31, 2017, we exercised our option to fully internalize our management team and terminate the existing management agreement. See Note 3 — Acquisition of Our Former Manager’s Agency Platform for details.

Substantially all of our operations are conducted through our operating partnership, Arbor Realty Limited Partnership (“ARLP”), for which we serve as the general partner, and ARLP’s subsidiaries. We are organized to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. Certain of our assets that produce non-qualifying income, primarily within the Agency Business, are operated through taxable REIT subsidiaries (“TRS”), which is part of our TRS consolidated group (the “TRS Consolidated Group”) and is subject to U.S. federal, state and local income taxes. See Note 18 — Income Taxes for details.

Note 2 — Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), for interim financial statements and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in the consolidated financial statements prepared under GAAP have been condensed or omitted. In our opinion, all adjustments considered necessary for a fair presentation of our financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with our financial statements and notes thereto included in our 2016 Annual Report.

During the third quarter of 2017, we determined that the purchase price allocation related to the Acquisition in 2016 incorrectly omitted a deferred tax liability related to the book-to-tax difference in the value assigned to certain assets acquired. The impact of this omission to our 2016 consolidated financial statements was a $4.9 million understatement of goodwill and a corresponding understatement of other liabilities in our consolidated balance sheets. This omission had no impact on our results of operations and was corrected in the third quarter of 2017, resulting in a $4.9 million increase to goodwill and a corresponding increase in other liabilities.

Principles of Consolidation

The accompanying unaudited consolidated financial statements include our financial statements and the financial statements of our wholly owned subsidiaries, partnerships and other joint ventures in which we own a controlling interest, including variable interest entities (“VIEs”) of which we are the primary beneficiary. Entities in which we

Table of Contents

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

have a significant influence are accounted for under the equity method. See Note 16 — Variable Interest Entities for information about our VIEs. All significant intercompany transactions and balances have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that could materially affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Significant Accounting Policies

We describe our significant accounting policies in our 2016 Annual Report. There have been no significant changes in our significant accounting policies since December 31, 2016.

Recently Adopted Accounting Pronouncements

Description	Adoption Date	Effect on Financial Statements

In October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-17, Consolidation: Interests Held through Related Parties That Are under Common Control. This ASU alters how a decision maker needs to consider indirect interests in a VIE held through an entity under common control and requires consideration of only an entity’s proportionate indirect interest in a VIE held through a common control party.	First quarter of 2017.	The adoption of this guidance did not have a material impact on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This ASU is intended to simplify several aspects of the accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.	First quarter of 2017.	The adoption of this guidance did not have a material impact on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting. This ASU, among other things, eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods the investment was held.	First quarter of 2017.	The adoption of this guidance did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements

The following table is not intended to represent all recently issued accounting pronouncements that are not yet effective and which have not yet been adopted by us. This table should be read in conjunction with the recently issued accounting pronouncements section included in our 2016 Annual Report.

Description	Effective Date	Effect on Financial Statements

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. This ASU eliminates step two from the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value with the carrying amount of goodwill.	First quarter of 2020 with early adoption permitted beginning in the first quarter of 2017.	We are evaluating the timing of our adoption and the impact this guidance may have on our consolidated financial statements.

Table of Contents

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

Description	Effective Date	Effect on Financial Statements

In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business. This ASU provides a more robust framework to use in determining when a set of assets and activities constitutes a business. It also provides more consistency in applying the guidance, reduces the costs of application and makes the definition of a business more operable.	First quarter of 2018.	The potential impact of this new guidance will be assessed for future acquisitions, but it is not expected to have a material impact on our consolidated financial statements.

Since 2014, the FASB has issued several amendments to its guidance on revenue recognition. The amended guidance, among other things, introduces a new framework for a single comprehensive model that can be used when accounting for revenue and supersedes most current revenue recognition guidance, including that which pertains to specific industries. The core principle states that an entity should recognize revenue to depict the transfer of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods and services. It also requires expanded quantitative and qualitative disclosures that will enable financial statement users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Most revenue associated with financial instruments, including interest and loan origination fees, along with gains and losses on investment securities, derivatives and sales of financial instruments are excluded from the scope of the guidance.	First quarter of 2018 and permits the use of either the full retrospective or modified retrospective method.	We have evaluated the new standard and determined that substantially all of our revenue, including interest income, loan origination fees, servicing income and gains on sales of loans and investment securities, are not impacted. This standard may impact the timing of gains on certain sales of real estate, however, we have determined that this standard will not materially impact our total revenues or footnote disclosures. We will adopt this standard in the first quarter of 2018 using the modified retrospective method for any contracts that are not complete as of the adoption date.

Note 3 — Acquisition of Our Former Manager’s Agency Platform

On July 14, 2016, we completed the previously announced Acquisition of the agency platform of our Former Manager pursuant to an asset purchase agreement dated February 25, 2016 (“Purchase Agreement”). The aggregate purchase price was $275.8 million, which was paid with $138.0 million in stock, $87.8 million in cash and with the issuance of a $50.0 million seller financing instrument. The equity component of the purchase price was paid with 21,230,769 operating partnership units (“OP Units”), which was based on a stock price of $6.50 per share. The closing price of our common stock on the Acquisition date was $7.29 per share; therefore, the estimated fair value of the total consideration was $292.5 million. See Note 11 — Debt Obligations for details about the seller financing and Note 17 — Equity for details about the OP Units.

We finalized the purchase price allocation during the first quarter of 2017 based on the estimated fair values of the assets acquired and liabilities assumed as of the Acquisition date. See Note 2 — Basis of Presentation and Significant Accounting Policies for details of an adjustment made to the purchase price allocation in the third quarter of 2017.

Internalization of Management Team

In connection with the Acquisition, we had the option to fully internalize our management team and terminate the existing management agreement with our Former Manager for $25.0 million. On May 31, 2017, we exercised that option and fully internalized our management team, which included approximately 100 employees. We incurred expenses of less than $0.1 million in connection with this transaction. We accounted for this transaction as a business combination with the settlement of a preexisting relationship. The total purchase price of $25.0 million was assigned to goodwill since the asset transferred represented an assembled workforce. Goodwill was allocated $12.5 million each to our two reporting segments and is expected to be deductible for tax purposes.

Accounting guidance requires the settlement of preexisting relationships to be accounted for separately from the business combination, with the recognition of any corresponding gain or loss through the statement of income upon settlement. Any potential gain or loss is measured based on the favorable or unfavorable terms of the management agreement from the prospective of the acquirer, when compared to current market rates for similar services. Based on this guidance, we performed an analysis and determined that the terminated management agreement contained terms similar to those of arrangements with comparable companies, and therefore no such gain or loss was recorded.

Table of Contents

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

Note 4 — Loans and Investments

The following tables set forth the composition of our structured loan and investment portfolio:

	September 30, 2017			Percent of Total		Loan Count	Wtd. Avg. Pay Rate (1)		Wtd. Avg. Remaining Months to Maturity	Wtd. Avg. First Dollar LTV Ratio (2)		Wtd. Avg. Last Dollar LTV Ratio (3)

Bridge loans	$	1,841,484,888		88	%	129	5.89	%	19.0	0	%	72	%
Preferred equity investments	155,306,620			7	%	11	6.92	%	68.3	62	%	88	%
Mezzanine loans	72,328,033			4	%	8	10.24	%	26.9	29	%	69	%
Junior participation loan (4)	25,256,582			1	%	1	—		—	100	%	100	%
	2,094,376,123			100	%	149	6.04	%	22.7	7	%	74	%
Allowance for loan losses	(83,255,922		)
Unearned revenue	(13,564,216		)
Loans and investments, net	$	1,997,555,985

	December 31, 2016

Bridge loans	$	1,602,658,179		90	%	120	5.59	%	16.4	0	%	73	%
Preferred equity investments	68,120,639			4	%	10	6.83	%	23.8	42	%	91	%
Mezzanine loans	57,124,566			3	%	12	9.09	%	17.9	36	%	75	%
Junior participation loans	62,256,582			3	%	2	4.50	%	4.0	83	%	84	%
	1,790,159,966			100	%	144	5.71	%	16.3	6	%	75	%
Allowance for loan losses	(83,711,575		)
Unearned revenue	(10,716,040		)
Loans and investments, net	$	1,695,732,351

(1) “Weighted Average Pay Rate” is a weighted average, based on the unpaid principal balance (“UPB”) of each loan in our portfolio, of the interest rate that is required to be paid monthly as stated in the individual loan agreements. Certain loans and investments that require an additional rate of interest “Accrual Rate” to be paid at maturity are not included in the weighted average pay rate as shown in the table.

(2) The “First Dollar Loan-to-Value (“LTV”) Ratio” is calculated by comparing the total of our senior most dollar and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which we will absorb a total loss of our position.

(3) The “Last Dollar LTV Ratio” is calculated by comparing the total of the carrying value of our loan and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which we will initially absorb a loss.

(4) This loan is currently past its maturity and is fully reserved.

Concentration of Credit Risk

We are subject to concentration risk in that, at September 30, 2017, the UPB related to 32 loans with five different borrowers represented 15% of total assets. At December 31, 2016, the UPB related to 35 loans with five different borrowers represented 16% of total assets. During both the nine months ended September 30, 2017 and the year ended December 31, 2016, no single loan or investment represented more than 10% of our total assets and no single investor group generated over 10% of our revenue.

Effective January 1, 2017, we revised our methodology used to assign a credit risk rating to each loan and investment to be consistent with the method used by our Agency Business. We now assign ratings of pass, pass/watch, special mention, substandard or doubtful to each loan and investment, instead of a one to five rating. Similar to our previous methodology, there are five ratings, each generally consistent with our prior ratings (i.e., pass is equivalent to a one rating, pass/watch is equivalent to a two rating, etc.), with a pass rating being the lowest risk and a doubtful rating being the highest.

The benchmark guidelines and other factors used in our revised methodology are substantially the same as our previous methodology. Each credit risk rating has benchmark guidelines that pertain to debt-service coverage ratios, LTV ratios, borrower strength, asset quality, and funded cash reserves. Other factors such as guarantees, market strength, and remaining loan term and borrower equity are also reviewed and factored into determining the credit risk rating assigned to each loan. This metric provides a helpful snapshot of portfolio quality and credit risk. Given our asset management approach, however, the risk rating process does not result in differing levels of diligence

Table of Contents

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

contingent upon credit rating. That is because all portfolio assets are subject to the level of scrutiny and ongoing analysis consistent with that of a “high-risk” loan. Assets are subject to, at minimum, a thorough quarterly financial evaluation in which historical operating performance and forward-looking projections are reviewed.

Generally speaking, given our typical loan profile, risk ratings of pass, pass/watch and special mention suggest that we expect the loan to make both principal and interest payments according to the contractual terms of the loan agreement, and is not considered impaired. A risk rating of substandard indicates we anticipate the loan may require a modification of some kind. A risk rating of doubtful indicates we expect the loan to underperform over its term, and there could be loss of interest and/or principal. Further, while the above are the primary guidelines used in determining a certain risk rating, subjective items such as borrower strength, market strength or asset quality may result in a rating that is higher or lower than might be indicated by any risk rating matrix.

As a result of the loan review process at September 30, 2017 and December 31, 2016, we identified loans and investments that we consider higher-risk loans that had a carrying value, before loan loss reserves, of $147.5 million and $150.5 million, respectively, and a weighted average last dollar LTV ratio of 94% and 95%, respectively.

A summary of the loan portfolio’s weighted average internal risk ratings and LTV ratios by asset class is presented below. The internal risk ratings as of December 31, 2016 have been converted to reflect the revised methodology described above.

	September 30, 2017
Asset Class	Unpaid Principal Balance		Percentage of Portfolio		Wtd. Avg. Internal Risk Rating	Wtd. Avg. First Dollar LTV Ratio		Wtd. Avg. Last Dollar LTV Ratio

Multifamily	$	1,556,114,399	75	%	pass/watch	5	%	73	%
Land	140,054,798		7	%	substandard	0	%	88	%
Commercial	133,230,000		6	%	pass	1	%	71	%
Office	133,143,446		6	%	pass/watch	19	%	71	%
Hotel	90,725,147		4	%	special mention	39	%	83	%
Retail	36,483,333		2	%	pass/watch	8	%	66	%
Healthcare	4,625,000		<1	%	special mention	0	%	73	%
Total	$	2,094,376,123	100	%	pass/watch	7	%	74	%

	December 31, 2016

Multifamily	$	1,421,731,108	79	%	special mention	1	%	73	%
Land	137,255,369		8	%	substandard	2	%	92	%
Commercial	9,205,000		<1	%	special mention	12	%	69	%
Office	141,710,156		8	%	pass/watch	43	%	73	%
Hotel	70,750,000		4	%	special mention	30	%	74	%
Retail	3,958,333		<1	%	special mention	81	%	91	%
Healthcare	5,550,000		<1	%	special mention	0	%	63	%
Total	$	1,790,159,966	100	%	special mention	6	%	75	%

Geographic Concentration Risk

As of September 30, 2017, 20%, 16%, 11% and 8% of the outstanding balance of our loan and investment portfolio had underlying properties in New York, Texas, California and Georgia, respectively. As of December 31, 2016, 25%, 15%, 14% and 13% of the outstanding balance of our loan and investment portfolio had underlying properties in New York, California, Florida and Texas, respectively.

Table of Contents

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

Impaired Loans and Allowance for Loan Losses

We evaluate each loan in our portfolio quarterly to assess the performance of our loans and whether a reserve for impairment should be recorded. We measure our relative loss position for our mezzanine loans, junior participation loans and preferred equity investments by determining the point where we will be exposed to losses based on our position in the capital stack as compared to the fair value of the underlying collateral. We determine our loss position on both a first dollar LTV and a last dollar LTV basis, as defined above. A summary of the changes in the allowance for loan losses is as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2017		2016			2017			2016

Allowance at beginning of period	$	81,255,922	$	83,831,575		$	83,711,575		$	86,761,575
Provision for loan losses	2,000,000		—			2,000,000			59,005
Charge-offs	—		—			—			(2,959,005		)
Recoveries of reserves	—		(15,000		)	(2,455,653		)	(45,000		)
Allowance at end of period	$	83,255,922	$	83,816,575		$	83,255,922		$	83,816,575

During the three and nine months ended September 30, 2017, we determined that the fair value of the underlying collateral securing a preferred equity investment with an aggregate carrying value of $34.8 million was less than the net carrying value of the investment, resulting in a $2.0 million provision for loan losses. In addition, during the nine months ended September 30, 2017, a fully reserved mezzanine loan with a UPB of $1.8 million paid off in full, which resulted in a $1.8 million reserve recovery, and we recorded a reserve recovery of $0.7 million on a multifamily bridge loan.

During the nine months ended September 30, 2016, we received a $1.8 million discounted payoff on an impaired bridge loan with an aggregate carrying value before reserves of $4.8 million, resulting in the recognition of an additional provision for loan losses of $0.1 million and a charge-off of $3.0 million.

The recoveries of reserves for all periods presented were related to multifamily loans and the ratio of net recoveries to the average loans and investments outstanding during the nine months ended September 30, 2017 was 0.1%. The ratio of net charge-offs to the average loans and investments outstanding during the three and nine months ended September 30, 2016 were de minimis and (0.2)%, respectively.

There were no loans for which the fair value of the collateral securing the loan was less than the carrying value of the loan for which we had not recorded a provision for loan loss as of September 30, 2017 and 2016.

We have six loans with a carrying value totaling $120.5 million at September 30, 2017 that are collateralized by a land development project. These loans were scheduled to mature in September 2017 and were extended to September 2018. The loans do not carry a current pay rate of interest, but five of the loans with a carrying value totaling $111.2 million entitle us to a weighted average accrual rate of interest of 8.50%. In 2008, we suspended the recording of the accrual rate of interest on these loans, as they were impaired and we deemed the collection of this interest to be doubtful. As of September 30, 2017, we have cumulative allowances for loan losses of $49.1 million related to these loans. The loans are subject to certain risks associated with a development project including, but not limited to, availability of construction financing, increases in projected construction costs, demand for the development’s outputs upon completion of the project, and litigation risk. Additionally, these loans were not classified as non-performing as the borrower is in compliance with all of the terms and conditions of the loans.

Table of Contents

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

A summary of our impaired loans by asset class is as follows:

	September 30, 2017						Three Months Ended September 30, 2017				Nine Months Ended September 30, 2017
Asset Class	Unpaid Principal Balance		Carrying Value (1)		Allowance for Loan Losses		Average Recorded Investment (2)		Interest Income Recognized		Average Recorded Investment (2)		Interest Income Recognized

Land	$	131,085,948	$	125,325,106	$	53,883,478	$	131,085,948	$	—	$	131,085,948	$	—
Hotel	34,750,000		34,750,000		5,700,000		34,750,000		—		34,750,000		370,877
Office	27,549,082		22,764,944		21,972,444		27,551,332		27,728		27,555,832		79,065
Commercial	1,700,000		1,700,000		1,700,000		1,700,000		—		1,700,000		—
Multifamily	—		—		—		—		—		1,271,058		22,063
Total	$	195,085,030	$	184,540,050	$	83,255,922	$	195,087,280	$	27,728	$	196,362,838	$	472,005

	December 31, 2016						Three Months Ended September 30, 2016				Nine Months Ended September 30, 2016

Land	$	131,085,948	$	125,925,677	$	53,883,478	$	130,012,569	$	—	$	128,740,618	$	—
Hotel	34,750,000		34,496,296		3,700,000		34,750,000		291,542		34,750,000		857,459
Office	27,562,582		22,778,444		21,972,444		27,569,332		23,601		27,573,832		69,763
Commercial	1,700,000		1,700,000		1,700,000		1,700,000		—		1,700,000		—
Multifamily	2,542,115		2,450,618		2,455,653		2,654,615		22,937		5,004,615		134,142
Total	$	197,640,645	$	187,351,035	$	83,711,575	$	196,686,516	$	338,080	$	197,769,065	$	1,061,364

(1) Represents the UPB of six and eight impaired loans (less unearned revenue and other holdbacks and adjustments) by asset class at September 30, 2017 and December 31, 2016, respectively.

(2) Represents an average of the beginning and ending UPB of each asset class.

At September 30, 2017, five loans with an aggregate net carrying value of $32.6 million, net of related loan loss reserves of $27.9 million, were classified as non-performing. At December 31, 2016, three fully reserved loans with an aggregate carrying value of $22.9 million were classified as non-performing. Income from non-performing loans is generally recognized on a cash basis when it is received. Full income recognition will resume when the loan becomes contractually current and performance has recommenced.

A summary of our non-performing loans by asset class is as follows:

	September 30, 2017						December 31, 2016
Asset Class	Carrying Value		Less Than 90 Days Past Due		Greater Than 90 Days Past Due		Carrying Value		Less Than 90 Days Past Due		Greater Than 90 Days Past Due

Hotel	$	34,750,000	$	—	$	34,750,000	$	—	$	—	$	—
Office	20,472,444		—		20,472,444		20,472,444		—		20,472,444
Multifamily	2,601,528		—		2,601,528		680,653		—		680,653
Commercial	1,700,000		—		1,700,000		1,700,000		—		1,700,000
Retail	990,667		—		990,667		—		—		—
Total	$	60,514,639	$	—	$	60,514,639	$	22,853,097	$	—	$	22,853,097

At September 30, 2017 and December 31, 2016, we did not have any loans contractually past due 90 days or more that were still accruing interest.

Table of Contents

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

A summary of loan modifications, refinancings and/or extensions by asset class that we considered to be troubled debt restructurings were as follows:

Three Months Ended September 30, 2017								Nine Months Ended September 30, 2017
Asset Class	Number of Loans	Original Unpaid Principal Balance		Original Wtd. Avg. Rate of Interest	Modified Unpaid Principal Balance		Modified Wtd. Avg. Rate of Interest	Number of Loans	Original Unpaid Principal Balance		Original Wtd. Avg. Rate of Interest		Modified Unpaid Principal Balance		Modified Wtd. Avg. Rate of Interest

Hotel	—	$	—	—	$	—	—	1	$	34,750,000	4.01	%	$	34,750,000	4.01	%

Three Months Ended September 30, 2016										Nine Months Ended September 30, 2016

Multifamily	1	$	14,646,456	5.33	%	$	14,646,456	5.33	%	1	$	14,646,456	5.33	%	$	14,646,456	5.33	%
Office	1	2,315,000		4.03	%	2,315,000		4.03	%	1	2,315,000		4.03	%	2,315,000		4.03	%
	2	$	16,961,456	5.15	%	$	16,961,456	5.15	%	2	$	16,961,456	5.15	%	$	16,961,456	5.15	%

The loan which was modified during the nine months ended September 30, 2017 was considered a troubled debt restructuring as a result of a forbearance agreement entered into with the borrower in the second quarter of 2017 and was classified as non-performing as of September 30, 2017. There were no other loans in which we considered the modifications to be troubled debt restructurings that were subsequently considered non-performing as of September 30, 2017 and 2016 and no additional loans were considered to be impaired due to our troubled debt restructuring analysis for the three and nine months ended September 30, 2017 and 2016. These loans were modified to increase the total recovery of the combined principal and interest from the loan.

Given the transitional nature of some of our real estate loans, we may require funds to be placed into an interest reserve, based on contractual requirements, to cover debt service costs. As of September 30, 2017, we had total interest reserves of $30.1 million on 70 loans with an aggregate UPB of $1.09 billion. As of December 31, 2016, we had total interest reserves of $20.4 million on 75 loans with an aggregate UPB of $1.01 billion.

Note 5 — Loans Held-for-Sale, Net

Loans held-for-sale, net consists of the following:

	September 30, 2017			December 31, 2016

Fannie Mae	$	185,188,000		$	538,189,475
Freddie Mac	142,312,000			124,102,000
FHA	1,033,203			56,247
	328,533,203			662,347,722
Fair value of future MSR	5,450,662			13,145,814
Unearned discount	(715,889		)	(2,126,232		)
Loans held-for-sale, net	$	333,267,976		$	673,367,304

Our loans held-for-sale, net are typically sold within 60 days of loan origination and the gain on sales are included in gain on sales, including fee-based services, net in the consolidated statements of income. During the three and nine months ended September 30, 2017, we sold $1.05 billion and $3.62 billion, respectively, of loans held-for-sale and recorded gain on sales of $16.3 million and $52.1 million, respectively. During both the three and nine months ended September 30, 2016, we sold $551.8 million of loans held-for-sale, excluding $418.2 million of sales related to loans that were acquired on July 14, 2016 as part of the Acquisition, and recorded gain on sales of $9.0 million. At September 30, 2017 and December 31, 2016, there were no loans held-for-sale that were 90 days or more past due, and there were no loans held-for-sale that were placed on a non-accrual status.

Table of Contents

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

Note 6 — Capitalized Mortgage Servicing Rights

Our capitalized mortgage servicing rights (“MSRs”) reflect commercial real estate MSRs derived from loans sold in our Agency Business. The discount rates used to determine the present value of our MSRs throughout the periods presented for all MSRs were between 8-15% (representing a weighted average discount rate of 13%) based on our best estimate of market discount rates. The weighted average estimated life remaining of our MSRs was 7.1 years and 6.9 years at September 30, 2017 and December 31, 2016, respectively.

A summary of our capitalized MSR activity is as follows:

	Three Months Ended September 30, 2017									Nine Months Ended September 30, 2017
	Acquired			Originated			Total			Acquired			Originated			Total
Balance at beginning of period	$	168,189,300		$	74,894,159		$	243,083,459		$	194,800,754		$	32,942,232		$	227,742,986
Additions	—			20,719,529			20,719,529			—			66,273,164			66,273,164
Amortization	(8,952,573		)	(2,758,805		)	(11,711,378		)	(29,074,057		)	(6,353,160		)	(35,427,217		)
Write-offs	(4,193,665		)	(22,286		)	(4,215,951		)	(10,683,635		)	(29,639		)	(10,713,274		)
Balance at end of period	$	155,043,062		$	92,832,597		$	247,875,659		$	155,043,062		$	92,832,597		$	247,875,659

	Three and Nine Months Ended September 30, 2016
Balance at beginning of period	$	—		$	—		$	—
Additions	221,647,421			11,905,394			233,552,815
Amortization	(7,358,639		)	(227,885		)	(7,586,524		)
Write-offs	(1,669,081		)	—			(1,669,081		)
Balance at end of period	$	212,619,701		$	11,677,509		$	224,297,210

We recorded write-offs relating to specific MSRs, primarily due to prepayments of certain loans, of $4.2 million and $10.7 million during the three and nine months ended September 30, 2017, respectively, and $1.7 million during both the three and nine months ended September 30, 2016. We collected prepayment fees of $3.8 million and $7.9 million during the three and nine months ended September 30, 2017, respectively, and $1.5 million during both the three and nine months ended September 30, 2016, which are included as a component of servicing revenue, net on the consolidated statements of income. As of September 30, 2017 and December 31, 2016, we had no valuation allowance recorded on any of our MSRs.

The expected amortization of capitalized MSRs recorded as of September 30, 2017 is shown in the table below. Actual amortization may vary from these estimates.

Year	Amortization
2017 (three months ended 12/31/2017)	$	11,925,780
2018	45,577,306
2019	41,680,988
2020	35,461,494
2021	28,170,144
2022	22,176,139
Thereafter	62,883,808
Total	$	247,875,659

Table of Contents

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

Note 7 — Mortgage Servicing

An analysis of the product and geographic concentrations that impact our servicing revenue is shown in the following tables:

September 30, 2017
Product Concentrations					Geographic Concentrations
			Percent of			Percent of
Product	UPB		Total		State	Total
Fannie Mae	$	12,331,135,405	79	%	Texas	23	%
Freddie Mac	2,732,536,579		18	%	North Carolina	10	%
FHA	537,553,532		3	%	California	8	%
Total	$	15,601,225,516	100	%	New York	8	%
					Georgia	6	%
					Florida	5	%
					Other (1)	40	%
					Total	100	%

December 31, 2016
Product Concentrations					Geographic Concentrations
			Percent of			Percent of
Product	UPB		Total		State	Total
Fannie Mae	$	11,181,152,400	83	%	Texas	24	%
Freddie Mac	1,953,244,541		14	%	North Carolina	9	%
FHA	420,688,577		3	%	California	8	%
Total	$	13,555,085,518	100	%	New York	8	%
					Georgia	5	%
					Other (1)	46	%
					Total	100	%

(1) No other individual state represented 5% or more of the total.

At September 30, 2017 and December 31, 2016, our weighted average servicing fee was 48.0 basis points and 47.8 basis points, respectively. We held cash in escrow for these loans totaling $506.6 million and $401.7 million at September 30, 2017 and December 31, 2016, respectively, which is not reflected in our consolidated balance sheets. These escrows are maintained in separate accounts at two federally insured depository institutions, which may exceed FDIC insured limits.

Note 8 — Securities

Available-for-Sale

Our available-for-sale securities consist of equity securities and Agency Business commercial mortgage interest-only securities (“Agency IOs”) from loans sold and securitized under the Freddie Mac Small Balance Loan Program (“SBL Program”).

Equity Securities. We own common stock of CV Holdings, Inc., formerly Realty Finance Corporation, which is a commercial real estate specialty finance company. These securities are carried at their estimated fair value with unrealized gains (losses) reported in accumulated other comprehensive income.

Table of Contents

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

The following is a summary of the equity securities classified as available-for-sale:

	September 30, 2017
	Amortized Cost		Cummulative Unrealized Gain		Carrying Value / Estimated Fair Value

2,939,465 common shares of CV Holdings, Inc.	$	58,789	$	205,764	$	264,553

	December 31, 2016

2,939,465 common shares of CV Holdings, Inc.	$	58,789	$	558,499	$	617,288

Agency IOs. Through our Agency Business, we originate and sell loans to Freddie Mac under the SBL Program, which are then pooled and securitized. Prior to the Acquisition and upon securitization of SBL Program loans, our Former Manager received Agency IOs under the SBL Program, which we acquired in the Acquisition. We elected the fair value option for the Agency IOs, which requires changes in fair value to be recognized through earnings. We record such gains and losses to gain on sales, including fee-based services, net in the consolidated statements of income. As a result of changes in the Freddie Mac SBL Program in 2016, we do not expect to receive Agency IOs from future securitizations.

A summary of our Agency IOs activity is as follows:

	Three Months Ended September 30, 2017			Nine Months Ended September 30, 2017
Balance at beginning of period	$	4,602,722		$	4,786,175
Changes in fair value	(160,190		)	(343,643		)
Balance at end of period	$	4,442,532		$	4,442,532

	Three and Nine Months Ended September 30, 2016
Balance at beginning of period	$	—
Additions from the Acquisition	4,908,283
Changes in fair value	(46,021		)
Balance at end of period	$	4,862,262

The UPB of loans associated with our Agency IOs was $839.2 million and $904.4 million at September 30, 2017 and December 31, 2016, respectively, which mature between 2035 and 2036. During the three and nine months ended September 30, 2017, we recognized interest income related to these Agency IOs of $0.3 million and $0.9 million, respectively, and $0.3 million during both the three and nine months ended September 30, 2016.

Held-to-Maturity

As part of the SBL Program securitizations described above, we are required to purchase the bottom tranche bond, generally referred to as the “B Piece,” that represents the bottom 10%, or highest risk of the securitization. During the nine months ended September 30, 2017, we retained 49%, or $28.1 million initial face value of two B Piece bonds, at a discount, for $18.3 million and sold the remaining 51% to the third party at par. Prior to 2017, a third party investor agreed to purchase the entire B Piece of each SBL Program securitization at par. These held-to-maturity securities are carried at cost, net of unamortized discounts and are collateralized by a pool of multifamily mortgage loans, bear interest at an initial weighted average variable rate of 3.55% and have an estimated weighted average maturity of 6.1 years. The weighted average effective interest rate was 13.38% at September 30, 2017,

Table of Contents

ARBOR REALTY TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2017

including the accretion of discount. Approximately $3.4 million is estimated to mature within one year, $11.3 million is estimated to mature after one year through five years, $8.1 million is estimated to mature after five years through ten years and $5.2 million is estimated to mature after ten years.

The following is a summary of the held-to-maturity securities we held at September 30, 2017:

	Face Value		Carrying Value		Unrealized Gain		Estimated Fair Value
B Piece bonds	$	28,035,293	$	18,851,089	$	31,908	$	18,882,997

We do not intend to sell these investments and it is not more-likely-than-not that we will be required to sell these investments before recovering the cost basis, which may be at maturity. These securities are evaluated periodically to determine whether a decline in their value is other-than-temporary, though such a determination is not intended to indicate a permanent decline in value. As of September 30, 2017, no impairment was recorded on these held-to-maturity securities. During the three and nine months ended September 30, 2017, we recorded interest income of $0.5 million and $0.9 million, respectively, related to these investments.

Note 9 — Investments in Equity Affiliates

We account for all investments in equity affiliates under the equity method. The following is a summary of our investments in equity affiliates:

	Investments in Equity Affiliates at				UPB of Loans to Equity Affiliates at
Equity Affiliates	September 30, 2017		December 31, 2016		September 30, 2017

Arbor Residential Investor LLC	$	26,821,643	$	28,917,457	$	—
West Shore Café	2,120,347		2,050,347